Semiconductor companies are not the kind of company one wishes to buy and hold for years and years. They are a cyclical investment, which means that they do great during some periods of time, and terribly the rest of the time. On balance, they never really go anywhere.
The reason is due to the business cycle. Just as with computers, the newest and greatest chip comes out with a price tag that only government labs and those with more money than sense are willing to pay. As more chips are made and the companies that make them become more efficient, the price drops and more chips are sold. When the chip price reaches a certain price – about $4 each for memory chips – the company opens up tons of factories and sells as many chips as they can. Then, too many chips are made, the price per chip drops to about $2, and the companies close down factories, using up most of the profits they made during the good times to pay for the closures. At that point, the new, latest and greatest chip comes out. Then the cycle starts again.
The strategy is to buy when chip makers are relatively cheap, hold for a while, and then sell when they are at the top of the business cycle. It is difficult to predict how far prices will go up or how far they will crash, but if one simply picks an upper and lower price (or price to sales ratio) and buys at the low ratio and sells at the high, one can make a decent return. Of course, one will be paying capital gains taxes at each sale, so the effect of compounding will be diminished. Note that this is more entertainment than serious investing.
Right now we are in the middle-early stages of the chip upward cycle. While it would have been better to buy a few months ago (remember, buy when things are darkest), it still looks like chips still have room to run. The highest quality makers, including Altera who makes high quality memory chips, and Xilinx who makes field programmable gate array chips, look particularly good (Note that I am not recommending any particular stocks for any individuals - I don’t know your particular situation, so do your own research). One of my favorites has always been Cypress semiconductor, no so much for their business, but because of their outspoken CEO TJ Rodgers who once stood up to a group of activist nuns calling for more diversity on the board. Cypress looks less exciting than others at this time, however.
If you decide to get on board, remember that the ride will end within the next couple of years. Take some profits as you go, always risking less and less as the share prices climb higher. Don’t be left at the end with lots of shares when the inevitable end of this cycle comes along.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
